You’re just swinging in your hammock on a sunny summer day when an ad pops up on YouTube for home equity loans. It sounds like a pretty good deal and you have been wanting to put a pool in for years, but it’s a bank you’ve never heard of, and a quick message to your group chat reveals that no one you know has, either.
What you might have witnessed was an advertisement for a mortgage broker. Like a mortgage banker, a mortgage broker can find a mortgage loan for your situation, but that’s where the two start to diverge.
Brokers and Bankers and Mortgages, Oh My!
Let’s start with some simple explanations just so we’re all on the same page.
Mortgage Bankers are people who work for a specific bank, like Main Street Bank USA, and help customers of the bank (and potential customers) apply for mortgages that Main Street Bank USA funds. They only write loans for their employer, except in a few special cases. They’re typically paid a salary by the bank they work for, whether your loan is $50k or $500k.
Mortgage Brokers, on the other hand, have permission to sell loans from a portfolio of wholesale investing clients. These may be traditional banks like Big Bank USA (these are fake banks, just so we’re clear), or they may be investment groups like In It For The Interest, LLC. There’s nothing inherently wrong with this, but because a broker makes their money solely on commission, unscrupulous ones may be tempted to put their own interests above yours. Always vet any type of lender, for peace of mind, if nothing else.
How Mortgage Bankers Work
Mortgage bankers may have a more limited product line they can use to finance your home-related loan, but they have a great deal more control over them because all the underwriting is done within the bank itself. Your local branch might not originate loans, but there’s someone nearby that your banker can call to check status and collaborate with to solve problems like a loan that you’re all by a hair’s width from being able to qualify for.
When a banker takes your application, they may literally forward it to the next room, where local people get to work to verify your income, length of employment and so forth. If you have your checking account with the same bank, you can often skip the tedious submission of income document after income document, since they can pull a lot of information from that checking account.
When the underwriter is comfortable that you’re able to qualify for the loan you’re seeking, they call the title company that you (or you and the seller, in the case of a purchase) agreed to use. They probably already have a relationship with this company since it’s nearby. When they send documents over, the title company doesn’t wonder what to expect from your closing.
How Mortgage Brokers Work
Mortgage Brokers take your application up front, then shop their lenders to see who can make you the best loan based on your credit history, income and desired loan amount. Often, brokers can do things that bankers can’t, even though a banker knows the loan originator by their first name. For example, helping people with troublesome credit is sometimes an area of specialization for brokers. They have access to all sorts of unusual loans that can turn a hopeful into a homeowner, or at least a pool owner.
This is both bad and good. On one hand, you got a loan — woohoo! — but on the other, you’re going to pay for it. These kinds of loans are rarely cheap because the broker’s fees have to be figured into the equation somewhere. Remember, they get paid on commission, not on salary. A normal broker fee can be as much as two percent of your loan amount.
When a mortgage broker pulls off a miracle you were really counting on, though, that two percent seems pretty cheap. Really, it’s all relative to your needs and what’s realistic for your financial situation. Before you choose a broker, make sure that you’ve really vetted them because each company and broker can be as wildly varied as the portfolios they have to sell. Ask around, check online reviews, ask your Realtor their opinion. Chances are good that someone knows a reputable broker that they can set you up with rather than letting you jump in blind.